RBI on OPS: The Reserve Bank has cautioned on withdrawal of the old pension scheme by some states, saying it poses a major risk on the “subnational fiscal horizon” and would result in accumulation of unfunded liabilities for them in the coming years.
The comments in the RBI report titled ‘State Finances: A Study of Budget 2022-23’ come in the backdrop of Congress-ruled Himachal Pradesh announcing the withdrawal of the old Pension Scheme (OPS) linked to Dearness Allowance (DA). Wala has become the latest state. ,
Earlier, the governments of Rajasthan, Chhattisgarh and Jharkhand had informed the central government and the Pension Fund Regulatory and Development Authority (PFRDA) about their decision to restart OPS for their employees.
The Punjab government had also issued a notification on November 18, 2022 regarding the implementation of OPS for the state government employees who are currently being covered under NPS.
What RBI saw in the report
In 2004, the central government replaced the old pension scheme with a defined contribution pension scheme, the National Pension System (NPS).
“A major risk on the sub-national fiscal horizon is the possibility of changes to the old pension scheme by some states. The annual saving in fiscal resources from this move is short-lived,” the RBI report said.
By postponing current spending to the future, the report said states run the risk of accumulating unfunded pension liabilities in the coming years. Employees get fixed pension under the old pension scheme. Under this, the employee is entitled to 50 per cent of the last drawn pay as pension.
However, the pension amount is contributory under the National Pension System, which is in effect since 2004. Several economists have also expressed concern over a return to OPS, saying it would put a strain on state finances.
Top Planning Commission official labels OPS as “Rewadi”
Montek Singh Ahluwalia, former deputy chairman of the then Planning Commission, recently spoke against bringing back OPS, saying it was one of the biggest ‘revadis’. For 2022-23, the RBI report said states have projected an increase in revenue expenditure, mainly on account of non-developmental expenditure such as pensions and administrative services.
The budget allocation for medical and public health and natural calamities has been reduced, while the housing outlay has been increased. Committed expenditure, which includes interest payments, administrative services and pensions, is expected to increase marginally from 2021-22 (Re), the report said.
(With inputs from PTI)